What Is A Contract Extension?

Contract extension typically means an existing contract is continued for a period of time. Often, this will occur via the extension options in the contract. At the time a contract is extended, other terms might also be varied (such as pricing).

Understanding Contract Extension

Contracts are generally agreed upon for a fixed term, and as such, when the validity of the contract nears its expiry, one of two things usually happens: One, the contract reaches the end of its term and ceases to exist; Two, a brand new contract is agreed upon once the term expires. However, there is a third option as well. A contract may also be extended. In this case, a new contract needn’t be created. The date of termination of the contract is simply pushed further. This option is usually favorable in a situation where a contract has been agreed upon, but both parties are unable to carry out their performance obligations within the stipulated time period.

Read More: Vendor Contracts Due for Expiration?

Contract Extension

Your goal as a Contract Manager is to obtain the best value for money for your organization. There are a few options available to achieve this.

The contract can be:

• closed out if there is no further requirement for the services
• extended for a period of time before the contract ends
• renewed for the same or very similar services when the existing contract comes to an end
• tendered to market for a new contract.

The contract extension checklist will help you choose the best option for your organization’s needs for three reasons.

1. Structured contract review

A contract extension checklist provides a framework that steps you through the important matters to consider when deciding to extend or renew a contract such as:

• service provider’s performance over the life of the contract
• changes to your demand profile (more, less, different?)
• changes in the market (new providers, new products, better prices?)
• changes in business needs (through consultations)
  past extensions
• risk/value profile of contract

2. Recordkeeping

The checklist acts as a tool to keep a record of renewal activities and ensures that you can provide adequate supporting documentation to demonstrate your decision:

• delivers value for money
• meets the business’s needs
• means better value for money that would not be obtained by going to tender

It's best practice to always use the checklist – even for routine contract extensions/renewals. If your contract is more complex, e.g. high-value or high-risk, the checklist can still be used as a summary of key information to accompany further supporting evidence and documentation that your organization may require.

3. Anti-corruption tool

Because the checklist ensures the contract and supplier performance are honestly reviewed and appraised, it is a worthy tool for protecting you and your business against corruption. Should issues be highlighted during this process, it provides enough time for them to be corrected or for a tender to be planned and a new supplier selected.

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